OCC Challenges California Climate Disclosure Laws, Seeks Exemption for National Banks

Key Takeaways

• OCC Seeks Exemption: The federal banking regulator has urged California to exempt national banks and federal savings associations from two climate disclosure laws.
• Reporting Requirements Challenged: SB 253 requires annual greenhouse gas emissions disclosures from covered companies with revenues exceeding $1 billion, while SB 261 requires biennial climate-related financial risk reports from covered companies exceeding $500 million.
• Banking Burdens Cited: The OCC argues that the requirements could impose disproportionate costs on smaller institutions, disrupt customer relationships and discourage some banks from operating in California.
• Federal Authority at Issue: The agency warns that applying the laws to federally chartered banks may conflict with federal preemption protections and restrictions on state supervisory authority.
• Further Action Possible: The OCC has requested regulatory clarification rather than issuing a definitive legal determination and will assess California's implementation before deciding whether additional action is necessary.

Deep Dive

The Office of the Comptroller of the Currency has asked California to exempt federally chartered banks from two climate disclosure laws, warning that the reporting requirements could interfere with federal banking supervision and prompt some institutions to withdraw from the state.

In an October 29 letter to the California Air Resources Board (CARB), the OCC challenged the application of Senate Bills 253 and 261 to national banks and federal savings associations. The agency argues that the laws would impose costly reporting obligations without accounting for differences in banks' size, complexity or financial risks. It also raised concerns about federal preemption and the limits of state authority over nationally chartered institutions.

The OCC has not declared the laws invalid or directed banks to disregard them. Instead, it is asking CARB to exclude federally chartered institutions as the state develops its implementing regulations. The agency said it would review California's decisions before determining whether further action was necessary.

The disagreement concerns two laws with different reporting requirements. SB 253, the Climate Corporate Data Accountability Act, requires companies doing business in California with annual revenues exceeding $1 billion to disclose greenhouse gas emissions each year. Those disclosures cover direct emissions, emissions associated with purchased energy and indirect emissions throughout a company's value chain.

SB 261 applies to companies doing business in the state with annual revenues exceeding $500 million. It requires reports every two years describing climate-related financial risks and the measures companies have taken to address them.

California has encountered legal challenges as it implements the legislation. According to the OCC, CARB has deferred further action on SB 261 pending the outcome of litigation challenging that law. Work on SB 253 continues, with the agency developing implementing regulations following consultations with affected industries.

The OCC's objection begins with the revenue thresholds. Although the laws distinguish between companies according to annual revenue, the federal regulator argues that those thresholds do not adequately reflect how banks are supervised.

A bank's revenue, the OCC contends, does not necessarily establish the degree of financial risk it presents or the resources it can reasonably devote to compliance. The agency warns that California's requirements could extend to smaller, less complex institutions, including banks that would have fallen outside the scope of the OCC's former principles for managing climate-related financial risk. Those principles have since been rescinded.

The OCC supervises approximately 1,000 federally chartered banks, ranging from community institutions to the country's largest banking organizations. Together, they hold roughly two-thirds of U.S. banking assets.

The agency maintains that its supervision should concentrate on material financial risks to individual institutions. It argues that California's laws would require banks to devote substantial resources to climate reporting without first establishing whether those disclosures reflect risks to their financial condition.

In some cases, the OCC warns, the obligations could divert management attention from matters more directly affecting a bank's safety and soundness. The letter also raises the prospect of banks reducing their business in California to avoid the reporting requirements.

Smaller institutions with limited operations in the state might decide that the additional compliance costs are not justified, the OCC argues. Banks headquartered in California would have less flexibility and could face expenses that competitors outside the laws' reach would avoid.

The agency predicts that the resulting pressure could reduce competition, increase prices and limit access to financial services for California residents and businesses. It offers these as potential consequences of applying the laws to federally chartered banks, rather than documenting changes that have already occurred. The OCC is particularly concerned about the information banks may need to obtain from customers.

Compliance with emissions reporting requirements could require banks to request detailed information about customers' emissions and financial circumstances. Some customers, the agency argues, may regard those requests as intrusive or object to sharing information they consider confidential. Others could decline to provide the information or move their business to institutions that are not subject to the same requirements.

Because federally chartered banks operate across state lines, the OCC warns that these demands could affect customers with no direct connection to California. A reporting obligation imposed by one state could therefore alter banking relationships elsewhere in the country.

Federal Authority and the Limits of State Regulation

The OCC's legal objections rest on the division of authority between state governments and federal banking regulators. Under the Supremacy Clause of the Constitution, federal law can preempt state requirements that conflict with federal authority. In banking, the OCC points to the established principle that state laws may be preempted when they prevent or significantly interfere with a federally chartered bank's exercise of its powers.

The agency also cites its exclusive visitorial authority over federally chartered banks, which generally restricts states from exercising supervisory examination powers over those institutions. The OCC argues that these protections allow national banks to operate across the country without being subjected to competing state supervisory requirements.

They are also central to the dual banking system, under which state-chartered and federally chartered institutions operate alongside one another. Congress established that arrangement more than 150 years ago, allowing banks to choose between state and federal charters.

In its letter, the OCC contends that California's disclosure requirements may conflict with the legal protections governing federally chartered banks. The agency has not made a definitive preemption determination, however, and the letter does not establish that either law is unconstitutional.

Its immediate request is narrower. The OCC wants CARB to exempt national banks and federal savings associations or clarify that the laws do not apply to them.

The agency argues that such an exemption would reduce uncertainty for regulated institutions, account for the particular demands of banking supervision and help avoid additional legal challenges.

California's decision will determine whether the disagreement can be resolved through the state's implementing regulations or requires further intervention by the federal regulator. The OCC said it would continue monitoring state laws nationwide and take action where appropriate. For banks subject to California's reporting framework, the immediate question remains whether CARB will recognize the exemption the federal regulator has requested.

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